Discussion on buying rentals in the NW

[PeachesNCream]

I'm looking to add a leg of income and I've always been interested in owning rentals. I've been going off the "1% rule" where you want your monthly rent to be 1% of your total cost for a place. For example, if you buy a duplex for $150k, a good rental would charge at least $750 a month per unit. This seems like its pretty hard to do right now in the NW. In Boise our place was worth $300k and it rented for $1600 or 0.5% a month, not a good rental. Obviously the real estate market is going nuts right now and its a bad time to buy but are people in the NW having any luck with rentals? I live in Spokane and would like an area that is drivable (5 hours). Montana and Idaho seem to have have lower property taxes but Idaho is wayyyy inflated for buying. A friend of mine owns a triplex in Butte and says he's doing pretty well, I've been checking that area out but it doesn't look that promising at first glance. I wonder if Tri-Cities is interesting, maybe Moscow or Pullman with it being a college town. Also any advice on where to buy rentals is greatly appreciated. Anyone know forums where people talk about this?

[Bronco]

Never heard of this 1% theory. Unless you're paying all cash for the property, it's pretty arbitrary.

[dan_pdx]

I have a coworker who has a small apartment building with about 20 units in the Portland area, but he's had it for years, so got in for a much lower cost. He suggested that apartment buildings are better than SFH / duplexes etc. because in his experience people that rent apartments are long-term renters, and people that rent houses are saving for a house of their own - your renters will turn over that much more frequently. Of course, you need a lot more money to get into the apartment rental game so take that for what it's worth. When you're considering where you might buy, look into tenant protections - Portland is so strict now that small landlords are getting out of the market; you don't want to have your hands tied with a non-paying tenant who's protected from eviction, etc.

The Bigger Pockets forum would be a good place to dig into this more: https://www.biggerpockets.com/

[AdironRider]

The 1% rule sounds like one of those internet rules of thumb that are not realistic in the real world. At the very least, it sounds to general to actually work in practice.

Rentals cash flow more as time goes on, and are typically priced for sale on the mls at break even numbers (as in all in costs: maintenance, mortgage, taxes, water & sewer, and management costs). But 20 years later you will probably be clearing well over those costs with inflation as the mortgage stays the same.

You ultimately make your money when you sell it. It is a long term game. Find a place that doesn't cost you money now and breaks even(after your down payment) and you'll be in a very good place later on when it comes times to sell.

Apartment buildings over three units require even more capital up front, as in at least 25% down. I personally don't see houses or apartments having any hard and fast rule on turnover being more prevalent with one over the other, all renters leave eventually. The only thing I know that keeps people put longer is renting slightly under market rate, but then you leave money on the table. Its a balance.

[Timberridge]

I thought everyone was living rent free now?

[fatnslow]

I don't think you can work the 1 % rule in 2021 in any area with a population above 50K in the NW. The long game requires a substantial down payment to the point your rent covers all expenses with a bit extra to build a reserve. The real gain is the appreciation of the property itself while taking the depreciation while it's a rental. Most "programs" that offer real estate returns are bull shit that is based on low down, short term hold and never mention getting calls about plugged sinks, toilets and how come my heater isn't turning on without adjusting the thermostat ? Keep this in mind when looking at remote locations since most of these calls will require you pay someone to address it if you want to keep your renter happy.
Buying a rental in current market is tough unless you have some decent reserves or are capable of putting in some serious sweat equity right now in the NW.
Butte is about as cheap and undesirable as it gets and even that market is fairly high right now.

[RootSkier]

Here's a multifamily in Butte that would cashflow with zero dollars down:

https://www.zillow.com/homedetails/1...78197105_zpid/

[liv2ski]

I have never heard of the 1% rule and frankly never received that much rent in San Diego. To get close to the 1% rule you likely need to buy apartment buildings. My rentals rent for closer to .5% of the present values.

[liv2ski]

Here's a multifamily in Butte that would cashflow with zero dollars down:

https://www.zillow.com/homedetails/1...78197105_zpid/

Does not meet the 1% rule 2 fucking tenants to make a combine $795 a month. No fucking thank you.

Check out this simple and affordable duplex on the flats! Each unit features 663 sqft of living space with 1 bedroom and one bathroom. Both tenants are long term and monthly rents total $795.

[easyrdr]

Never heard of the 1% rule either. At my peak I owned seven single family rental homes. Now I'm down to two, sold the rest in the last two years because prices have gotten so stupid.

In the beginning I looked for undervalued, distressed properties that I could fix myself. I focused on foreclosures. I fixed everything myself or traded beer/expertise to friends to get the stuff done I couldn't do. After moving through a couple of those I slowly built up to higher quality, better location, etc. The key to any rental is long term ownership. If you don't plan on owning it for at least 5 years then I can guarantee you won't cash flow. You do it right you could have a nice income from it. The rentals ended up becoming my full-time job once I switched to renting them by the week instead of month to month. It was much more lucrative but a lot more work. I've been thinking of getting back in but my wife says no.

[RootSkier]

2 fucking tenants to make a combine $795 a month. No fucking thank you.
.

Oh shit, I read that as $795 each! Never mind. You'd have to be out of your fucking mind to be a landlord in Butte, anyways.

[XXX-er]

Never heard of the 1% rule either. At my peak I owned seven single family rental homes. Now I'm down to two, sold the rest in the last two years because prices have gotten so stupid.

In the beginning I looked for undervalued, distressed properties that I could fix myself. I focused on foreclosures. I fixed everything myself or traded beer/expertise to friends to get the stuff done I couldn't do. After moving through a couple of those I slowly built up to higher quality, better location, etc. The key to any rental is long term ownership. If you don't plan on owning it for at least 5 years then I can guarantee you won't cash flow. You do it right you could have a nice income from it. The rentals ended up becoming my full-time job once I switched to renting them by the week instead of month to month. It was much more lucrative but a lot more work. I've been thinking of getting back in but my wife says no.

I got a buddy who had a bunch of shitty small houses but he sez he put all the rent back into fixing the house showed no income and made $ when he sold the house

[easyrdr]

I got a buddy who had a bunch of shitty small houses but he sez he put all the rent back into fixing the house showed no income and made $ when he sold the house

Exactly. Use the rent to fix up the house, the more you fix it up the higher the rent, etc. All the while the properties are going up in value. Once I paid the first one down enough/value increased enough I took a line of credit out against the house to buy the next one. Of course I made sure I could cover a few months costs if shit hit the fan, thought I never had a problem. The best part about it was the rents paid the mortgages and the line of credit. Once I got the system dialed it wasn't hard to buy more. Then the bank shut me down when I tried to get a 4th mortgage. Apparently they are cool with 3 mortgage but not 4. So then I sold one house and paid off another then bought two more. My plan was to keep them forever and live on the rental income but then prices went crazy these last two years and I had people knocking my door down to buy them for obscene money. They were hitting me with returns I was expecting to get in another 10 years so I said fuck it and sold them. Even now I sit here and don't get it. Prices are even higher now than when I sold. I feel like at some point the madness will stop but now I'm not so sure.

[AdironRider]

Brrrr its getting cold in here.

[glademaster]

I paid $2000/month to rent half a duplex in western Washington. The tenants on the other side had been there for 8+ years and were paying in the $1400-1600/month range for their half. It was a decent place, but not worth $2000/month. That duplex cost my landlord close to $600K to buy. They were pushing their luck getting ~$3500/month in rent out of the place.

I guess what I'm saying is, your 1% rule is complete and utter bullshit.

And FWIW, I did a public records search to figure out what they paid for the place before I agreed to the rent. If they had been asking anywhere close to 1% of their sale price I would have renegotiated or walked away.

[m5d5cb]

I find this thread interesting because it seems like rentals and real estate is a good idea, but then you have to deal with tenants. So I have not bought any rental properties.

Is it really better than the stock market has been lately? Especially since March 2020 (good time to buy the dip).

I also have a real estate fund that pays 8% a year (plus quarterly excess profit sharing), monthly. It has delivered for the past 5 years since I joined.

What is a house appreciating 5-10%, plus rent, going to return?

[fatnslow]

I paid $2000/month to rent half a duplex in western Washington. The tenants on the other side had been there for 8+ years and were paying in the $1400-1600/month range for their half. It was a decent place, but not worth $2000/month. That duplex cost my landlord close to $600K to buy. They were pushing their luck getting ~$3500/month in rent out of the place.

I guess what I'm saying is, your 1% rule is complete and utter bullshit.

And FWIW, I did a public records search to figure out what they paid for the place before I agreed to the rent. If they had been asking anywhere close to 1% of their sale price I would have renegotiated or walked away.

What does it matter what your landlord paid for the place ? If you like the place, cool landlord and rent is market rate who the fuck cares ?
.

[fatnslow]

I find this thread interesting because it seems like rentals and real estate is a good idea, but then you have to deal with tenants. So I have not bought any rental properties.

Is it really better than the stock market has been lately? Especially since March 2020 (good time to buy the dip).

I also have a real estate fund that pays 8% a year (plus quarterly excess profit sharing), monthly. It has delivered for the past 5 years since I joined.

What is a house appreciating 5-10%, plus rent, going to return?

Buying a rental is kind of like option trading with a mortgage. The down payment is the real investment and you get the appreciation returns on the total value of the house, not just the down payment. Keep in mind it really is kind of a long game. If you can hold out long enough to own one outright it's a nice way to get some decent monthly income.

[muted]

Oh shit, I read that as $795 each! Never mind. You'd have to be out of your fucking mind to be a landlord in Butte, anyways.

Ha! If you lived out of state, your property manager probably should be someone north of 6' 2" and 200 pounds, maybe from Anaconda, and who takes no shit.

[PeachesNCream]

Lots of good stuff. Good to hear the 1% rule is bullshit, I was getting discouraged at looking at the NW. Either way I'll wait out to see what this crazy market does.

[PeachesNCream]

I find this thread interesting because it seems like rentals and real estate is a good idea, but then you have to deal with tenants. So I have not bought any rental properties.

Is it really better than the stock market has been lately? Especially since March 2020 (good time to buy the dip).

I also have a real estate fund that pays 8% a year (plus quarterly excess profit sharing), monthly. It has delivered for the past 5 years since I joined.

What is a house appreciating 5-10%, plus rent, going to return?

Similar to fatnslow said, you get to invest the value of your house not just the down payment. For example, if you would of bought a house in Spokane in 2017 say it cost $150,000. Say you did a down payment of $10k and $6k closing cost for a total investment of $16k and you rented it out to break even with your mortgage (conservative). Honestly today that house is worth about $225,000 so your $16k investment turned to $75k plus whatever part of the house you own. Obviously this market is unusual but I think if you act somewhat smart in what you're doing you'll get a good rate of return in the long term. I think the stock market is great but diversifying your investments seems like a good idea.

[PeachesNCream]

Exactly. Use the rent to fix up the house, the more you fix it up the higher the rent, etc. All the while the properties are going up in value. Once I paid the first one down enough/value increased enough I took a line of credit out against the house to buy the next one. Of course I made sure I could cover a few months costs if shit hit the fan, thought I never had a problem. The best part about it was the rents paid the mortgages and the line of credit. Once I got the system dialed it wasn't hard to buy more. Then the bank shut me down when I tried to get a 4th mortgage. Apparently they are cool with 3 mortgage but not 4. So then I sold one house and paid off another then bought two more. My plan was to keep them forever and live on the rental income but then prices went crazy these last two years and I had people knocking my door down to buy them for obscene money. They were hitting me with returns I was expecting to get in another 10 years so I said fuck it and sold them. Even now I sit here and don't get it. Prices are even higher now than when I sold. I feel like at some point the madness will stop but now I'm not so sure.

This seems smart. My current idea is to buy a liveable fixer upper, fix it up while I live in it, and then buy a new one and rent out the old. Rinse and repeat. Just exploring if buying a rental straight up also makes sense. Were you fixing it up while people were living in it? Or while you were living in it? Or between renters?

[fatnslow]

Lots of good stuff. Good to hear the 1% rule is bullshit, I was getting discouraged at looking at the NW. Either way I'll wait out to see what this crazy market does.

I'm sure there's some douche selling seminars or classes that preach that shit. Buy rentals in Alabama, Arkansas and Mississippi and make money never touching them !

[easyrdr]

This seems smart. My current idea is to buy a liveable fixer upper, fix it up while I live in it, and then buy a new one and rent out the old. Rinse and repeat. Just exploring if buying a rental straight up also makes sense. Were you fixing it up while people were living in it? Or while you were living in it? Or between renters?

Bought and lived in the first one for two years. Then rented it for the next 10. Bought the next one lived in it for 3 years. Then rented it. The rest after that bought and rented never lived in.

Here's my formula

Yearly Rent / Purchase Price of house = Yield
ex. $36k rent / $500k purchase price = 7.2%

yield greater than 8% good bargain
yield from 5% to 8% is safe if you plan owning for 5 years or more
below 5% you better know what the fuck you are doing

Most my yields were in the 9% to 11% range though I think that would be much harder to achieve today.

For me I also looked at how long it took to recoup what I had in it. It was always a buy for me if I got my down payment, closing costs, etc back out within the first 12 months. One house took 3 years but the upside was just to good to pass up. The fun really started when I was able to pay off a mortgage, and establish a solid line of credit. For the first few years I invested 100% of the rents into either improving or paying the mortgage on the rentals.

[Shredhead]

RE has a lot more tax advantages than the stock market and you can’t live in your portfolio. Every penny you pay to Home Depot, is a straight line deduction.

1031 your capital gains into nicer and nicer rentals.
Move in for two years, sell and take the 500k exclusion. Repeat every two years.

You do have to pay depreciation recapture, but that’s peanuts.